A private mortgage can have many advantages over one from a traditional bank. Whether you are thinking of obtaining a private mortgage or offering one, it is important that things are done correctly. Ideally, this should be a win-win situation.
1. Benefits of a private mortgage
There are many options in the mortgage world from going to the big banks, credit unions, online lenders etc. So what is the advantage of getting a private mortgage?
For starters, it can be much easier to qualify for a loan from a private lender. Traditional lenders require a lot of documentation. This can be hard to get if you have had credit problems in the past, are new to Canada or if you are self-employed.
If you get a private mortgage through a friend or family member, you could also end up paying considerably lower interest rates. Just be sure that everything is documented and filed properly for tax purposes.
2. Risks of private mortgages
As with any type of loan, there are risks to private mortgages. For starters, whenever you borrow money from a friend or family member it can change the relationship. Before using or offering a private mortgage consider how it might affect your relationship – especially if the borrower runs into financial difficulty.
The risk tolerance of the lender needs to be considered as well. Would a default mean they have to delay their retirement or maybe even declare bankruptcy?
The property should be evaluated carefully. The lender should be comfortable with the condition and location of the property. The house should be carefully inspected before the purchase to ensure that there are not any major issues with it.
3. Private mortgage agreements
If you decide to go forward with a private mortgage, it is critical that everything is well-documented and the loan agreement is written up by a professional. The agreement should set clear expectations for each party to avoid surprises as much as possible.
Expectations such as date payments are due, penalty for non-payment or late payment should all be clearly laid out.
It is also a wise idea to secure the loan. This allows the lender to foreclose on the property if the loan is not paid. Securing the loan means that at least the lender should be able to recoup their money in a worst-case-scenario.
In an ideal world, everyone can win with a private mortgage, but since the world is not always ideal it is best to protect yourself and ensure everything is done correctly. For help with private mortgages, call the experts at Akal Mortgages today at (416) 621-1300.
When we say YES! We stand behind our promise.
